01 Jan Will the Trends of 2025 Persist? – 2026 Q1 Commentary

2025 Review

We thank you for being a client of Morris & Wells during 2025.  The Year of the Snake certainly provided significant writhing back and forth within the market and within the M&W portfolio as a result of the tariff announcement in April along with volatility related to investors’ faith in the so-called “Artificial Intelligence (AI) trade.”  We also said goodbye professionally to our founder, Jack Darrell, as he retired at the end of the year.  We successfully navigated through all of this with a focus on our fiduciary duty to you every day.  We consider 2025 a success and will outline below some of the important points from the prior year and offer some out-of-consensus thoughts for 2026. 

The key takeaway for clients and potential new clients of Morris & Wells from 2025 is that we once again lived out our mantra that “volatility provides opportunity.”  When the S&P 500 dropped close to 20% between the market open on Thursday April 3, 2025 and Tuesday April 8, 2025, we repositioned the portfolio to take advantage of that extreme volatility caused by tariff announcements after the market close on Wednesday April 2, 2025.  Share prices across industries and companies dropped significantly at that time – making stocks we previously assessed as too expensive much better values.  The opportunity we saw at the time included gaining more exposure to the mega trend of AI infrastructure buildout and the ongoing M&W portfolio theme of cybersecurity.  One of the stocks purchased at that time has gained over 160% since April 8, 2025.

Our true north was key in helping us remain calm during that time and look for the opportunities amidst the significant volatility.  Our true north is that we hold minority ownership interests, in the form of common stock, in strong companies whose management teams constantly adjust to changing economic, political, and market environments.  If we align our portfolio holdings with corporate management teams that make good decisions, then their companies’ share prices and our portfolio will gain in value over time.  April provided major uncertainty, demonstrated by the many phone calls and emails we received.  As we shared then, the market hates uncertainty.  However, assuming strong product or service market fit, company management teams have incentives to do their best and grow their businesses and market value over time.  We never take our eye off that point.

Another key to the volatility experienced in April and to a lesser degree at other times throughout 2025 comes in the form of our significant tax efficiency.  As you know, we do not let tax decisions dominate portfolio investment decisions.  However, through our low cost investment strategy we routinely review the portfolio for tax losses that can either be used to offset gains in taxable accounts or be carried forward to 2026 to offset future gains.  The volatility earlier in 2025 allowed us to take losses for IRS purposes while continuing to try to protect and grow your assets.  Clients who did not take significant withdrawals out of their taxable accounts during the year have meaningful appreciation in their accounts in 2025 while having realized losses for tax purposes.  That combination is as tax efficient as an investment advisor can manage a portfolio.  The byproduct of that is the M&W portfolio coming out of 2025 with almost non-existent unrealized losses.  That means when you look at any potential realized gains during 2026, do not forget the offset of realized losses from 2025. 

A discussion of 2025 has to include the year-long increase in the price of gold and the price of silver.  M&W has been invested in precious metals miners at different points over time.  This included most of 2024 and all of 2025.  It happens that the shares of those companies did not provide much benefit to the portfolio in 2024, but attained some of the best individual performance and contribution during 2025.  The mining businesses have relatively fixed costs, so when the price of their underlying commodities increase, that additional profit per ounce tends to drop directly to the companies’ net income.  That dynamic increases the value of the underlying businesses, which becomes reflected in the share prices of those businesses.  The reasons behind the move up in the price of gold and silver this year include declining US interest rates, accumulation by foreign central banks, and general concern around the US dollar as the world’s reserve currency.  Currently, we do not see these trends abating during 2026. 

As we move into 2026, M&W would expect the investment media to focus on the question of whether the AI infrastructure buildout can continue as profitably as it has for the related companies.  Graph 1, below, illustrates that Amazon Web Services (AWS) pricing for renting out its compute power (GPU Spot Prices) suggests that all four of NVidia’s latest graphics processing units (GPU) have seen a recent tick up in rates.  This appears in contrast to the media sentiment that we find ourselves in the midst of an “AI Bubble.”  That being said, as we highlighted in a prior newsletter, we know that the AI infrastructure buildout has a cyclicality that we have seen across different industries in the past.  That means that at some point the buildout will become oversupplied, company sales growth will start to slow or decline, and associated share prices will likely decline.  We do not anticipate timing the transition out of the stocks of those cyclical businesses perfectly.  However, we want you to know that we are aware of the dynamic and spend significant time attempting to stay on top of the business trends of the various companies participating in the AI infrastructure buildout.

Graph 1:  GPU Demand Intact

As 2025 came to an end, several clients inquired whether we expect a market crash related to the “AI Bubble.”  As a reminder, if you need cash for short-term cash flow needs (zero to 18 months), we should discuss those needs and manage those assets with less volatile assets than stocks.  Similarly, as we do financial planning for you related to a near-term retirement, or if you are living in retirement, we want several years of distribution cash flow available in less volatile assets than stocks.  If this conversation has not begun, please help us start it.  Valuations in the S&P 500 remain historically elevated today.  Graph 2, below, illustrates (with the red dot) that at today’s S&P 500 price-to-earnings valuation, the subsequent 10-year returns to the index have not been great.  Today we do not see a dip in the enthusiasm of the AI infrastructure buildout.  However, we cannot ignore history either.  The aforementioned, M&W true north, influences our thinking and our actions significantly as it relates to this historical pattern.  One of the reasons we invest in a portfolio of individual companies instead of an index or several index funds or mutual funds, like many of our competitors, is that we work to try and outperform the various indices over time.  While the S&P 500 experienced a “lost decade” from the end of 1999 to the end of 2009, Darrell & King – now Morris & Wells – clients experienced meaningful gains in the firm’s stock portfolio.  The reason for that comes from a number of our investments going up in value while the S&P 500 did not.  We cannot promise that will happen again if the S&P 500 experiences another lost decade, as suggested by Graph 2, but with our investment strategy and ongoing investment research, we attempt to navigate all environments.

Graph 2:  S&P 500 Forward P/E vs. Subsequent 10-Year Annualized Returns

Our investment process and strategy help us remain optimistic about the investment opportunities ahead during 2026.  Graph 3, below, illustrates that the second year of a Presidential cycle has been middling.  The S&P 500 has increased in 54% of those years from 1928 to 2024.  Maybe that results from the uncertainty around a mid-term election cycle.  Whatever the reason, when we combine it with the information above regarding subsequent 10-year returns at today’s S&P 500 forward P/E ratio, we remain focused on our process and finding investment opportunities in the economic and market environment at any given time.  The importance of understanding history and market context cannot be overstated but we have no fear about figuring out the next opportunities and growing the value of the portfolio over time.  We see many businesses today that are thriving and appear undervalued from a stock market perspective.

Graph 3:  S&P 500 Performance during Presidential Cycles

Out-of-Consensus Thoughts and More for 2026

At this time of year, many market pundits publish their forecasts for the following year.  Forecasts include some outlandish predictions not in the financial media consensus.  We would like to humbly offer five scenarios that we think are out of consensus today, but we leave room in our minds for the small possibility of one or more of these scenarios coming to fruition.  These ideas are not meant to be “stunners,” but realistic scenarios.  We will monitor them throughout the year and adjust our thinking as additional information comes to the surface. 

2026’s Thoughts

1. The AI and datacenter buildout continues globally, but investors and the supply chain are reminded about the cyclicality of technology buildouts.  For 2025, we said that reminder may serve as a buying opportunity in the related stocks.  In 2026, we think it leads to more of a broadening out of sector performance within the stock market, which means the S&P 500 return for the year 2026 is determined more by companies other than the seven largest technology companies.

2. Despite it not feeling like a robust economic expansion to the average person on Main Street, companies continue to find efficiencies and corporate profits do expand, underpinning stock market gains in 2026.

3. The dynamics that drove the precious metals markets in 2025 do not abate.  The wider investment community invests more money into the industry, continuing share price appreciation. 

4. Wall Street believes the world is moving to a near-term oversupply of oil and gas.  Something disrupts this thesis and leads to tighter than expected energy markets, leading to higher than expected energy prices, which also affects the ability to lower the Fed Funds rate in #1.

5. The Federal Funds rate sits at 3.50% to 3.75% as we write this newsletter.  The Administration and whomever replaces Federal Reserve Chairman Jerome Powell will have a desire for lower interest rates.  However, sticky inflation and a stubborn “no fire no hire” employment market, leads to no meaningful decline in the Fed’s short-term interest rate target.

The year 2025 provided several market and portfolio moving events.  We had to adjust to those.  In order to move forward, we kept to our true north, investing in strong companies purchased at reasonable valuations.  We are sure 2026 will bring a similar number of market moving events.  We will see which, if any, of the out-of- consensus thoughts above come to fruition, and how to best navigate any surprises.  We wish you and your loved ones a great start to 2026, and want you to know how much we appreciate you as a client. 

If you have any questions about the above or anything else, please contact us.  We love to chat with you.  Thank you for your trust and ongoing support.  Have a great 2026!